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Swiping a piece of plastic to pay for things is second nature for most of us these days. But which piece of plastic should you be using — debit or credit?
Experts agree that relying on credit cards instead of debit cards or cash can benefit your finances in multiple ways. Here’s why you should put away your debit card and pull out a rewards credit card for most purchases.
The main reason to use a credit card over any other payment method is to earn rewards and maximize savings. Most credit cards offer rewards, such as points, miles, or cash back for every dollar you spend.
The best cash back cards offer 2% or more on everyday purchases like groceries and gas. The best travel credit cards offer 2X-5X points on flights and hotel bookings.
These cards give you free money for buying things you’d purchase anyway. Meanwhile, debit cards offer little to no rewards.
“The reality is, you are going to spend money even if you are not a big shopper,” says Ron Tallou, owner of Tallou Financial Services. “If you still purchase everyday essentials like groceries, cleaning products, or gas, you can reap the rewards, unlike when you use cash or a debit card.”
Using a cash back credit card by paying off your balance each month allows you to accumulate this “free money” in the form of rewards. You can redeem rewards for statement credits, gift cards, free travel, bookings, and more. Over time, regular credit card users can earn hundreds or even thousands in valuable rewards annually.
Examples of solid reward cards include:
Credit cards also include other money-saving perks you can’t find with a debit card. Examples include:
Many cards offer a sign-up bonus to new cardholders who meet a minimum spending requirement within a few months of opening the account. These bonuses often equal hundreds or thousands of cash, points, or miles.
These easy windfalls require just a few months of everyday purchases you’d make anyway to achieve bonus requirements. The extra rewards earned can be used to offset travel, groceries, statement credits, gift cards, and more.
Examples of cards with welcome bonuses include:
Another benefit of relying on credit over debit is the superior fraud protection and liability limits in case your card gets lost or stolen. Federal law caps consumer liability for fraudulent credit card charges at $50 per card. Most credit card providers even waive this fee.
Meanwhile, a stolen debit card drained of cash can be far more problematic. Checking accounts are directly linked to your funds. Although missing money can be refunded, the hassle and temporary loss of access to money can be considerable.
Paying your credit card bill on time monthly can help improve your credit score. Each on-time payment is reported to the national credit bureaus, which can steadily raise your score. This is especially advantageous for younger consumers or those building credit for the first time.
“Many younger borrowers may not have established credit yet, and using a credit card may demonstrate your financial responsibility by paying off your balance and repeating the process systematically,” says Steven Conners, president of Conners Wealth Management.
Having excellent credit unlocks better terms for loans and other needs in the future. Those with higher scores qualify for the best borrowing rates, which saves you money on interest over time.
Conversely, debit card spending doesn’t help credit since it isn’t a form of borrowing reported to bureaus. Those aiming to improve credit should minimize debit transactions.
Some key strategies for managing credit responsibly include:
Of course, credit cards do come with risks if used recklessly. Carrying balances month-to-month leads to fast-accumulating interest charges. Missed payments also trigger penalties — plus damage to your credit score.
If you’re prone to overspending, using a debit card or cash may make more sense. But, for most, credit cards are the best way to pay.
In the battle between debit cards versus credit cards, credit comes out as the winner for everyday purchases. The many perks and protections of credit are hard to beat. Just be sure to always pay on time and in full.
So next time you grab your wallet at checkout, reach for that rewarding credit card and make your money work harder.
Opinions expressed are author’s alone, not those of any bank, credit card issuer, or other entity. This content has not been reviewed, approved, or otherwise endorsed by any of the entities included in the post.